GSAM Fundamental Equity

view of the US equity markets:

Increased spending is driving
the economy
The US economic recovery has been driven by both an
increase in corporate capital expenditures and consumer
spending. Corporate profits seem to be improving and
management teams appear generally more positive.
Drastic cost cutting by companies throughout the
downturn has driven margins to near all-time highs. The
conservative stance that companies assumed has resulted
in increased operating leverage, and hence earnings
growth. High levels of cash on the balance sheets are
enabling companies to focus on investing for future growth
through increased capital expenditures. After a plunge in
consumer spending, core retail sales have rebounded due
to pent up demand and improved consumer confidence.
Despite the positive fundamental backdrop, the markets
have recently been driven by negative investor sentiment
resulting in attractive valuations as indicated by compelling
free cash flow yields1. We believe the improvement
in corporate profits, free cash flow and management
sentiment may allow select companies to make decisions
that enhance shareholder value.

Reasons to invest in the US equity market

Depth, breadth and diversification

1
With a current market capitalisation of almost $15 trillion, the US market makes up almost half of the MSCI World Index and is home
to 16 of the 20 largest companies in the world2. The US market offers more investible companies than any other single country market
and unparalleled diversification across sectors. As an example, we believe there are robust opportunities for investment in information
technology companies which can be a good complement to non-US portfolios that may have minimal exposure to technology companies.
At $14.3 trillion, the US accounts for the highest GDP in the world and is greater than the next three largest economies (Japan, China and
Germany) combined3.

Top 20 largest companies in the world Difference in sector weights (S&P 500 vs. MSCI Europe)
Rank Company Name Market Cap (US$ bn) Sector Country 20%
1 Exxon Mobil $268 Energy U.S. 16%
2 Apple $229 Info Technology U.S.
15%
3 Mircosoft $202 Info Technology U.S.
4 Berkshire Hathaway $197 Financials U.S.
5 Wal-Mart $180 Consumer Staples U.S. 10%
6 Procter & Gamble $173 Consumer Staples U.S.
7 Nestle $168 Consumer Staples Switz.
8 Johnson & Johnson $163 Health Care U.S. 5%
9 HSBC $161 Financials U.K. 2% 1% 1%
10 IBM $158 Info Technology U.S.
11 General Electric $154 Industrials U.S. 0%
0%
12 JPmorgan Chase & Co $146 Financials U.S. -2% -2%
13 Bank of America $144 Financials U.S.
-5% -4%
14 AT&T $143 Telecom Services U.S.
15 Google $142 Info Technology U.S. -6% -6%
16 Chevron $136 Energy U.S. -10%
17 Wells Fargo $133 Financials U.S. ar
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18 Novartis $129 Health Care Switz.

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19 Cisco $122 Info Technology U.S. H

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20 Toyota $120 Consumer Disc Japan

Source: FactSet as of 30/06/10. Source: FactSet as of 30/06/10.

2
The US consumer is spending again “Core” Retail Sales Trends (YoY %; “core” is ex-food, gas and autos)
Consumer spending has been stronger than expected, 20% Core Retail Sales Growth (%)
particularly in discretionary categories. Retailers posted
surprisingly strong results in the first quarter and there are 15%
signs of pent-up demand. A more stable unemployment 10%
picture and improving consumer confidence have
contributed to the rebound in consumer spending. Unemployment 5%
levels peaked in October of 2009 and a recent ISI survey of CFO hiring
0%
plans indicated an expected increase in hiring in 2010. Typically an
improving job outlook will have a positive impact on consumer spending. -5%
A transition to positive sales trends coincided with an improving
employment outlook as core retail sales (excludes autos, food and gas) -10%
1974 1978 1982 1986 1990 1994 1998 2002 2006 2010
growth increased by 5.3% in May4.
Source: US Census Bureau, Goldman Sachs Research as of 31/05/10.

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 GSAM Fundamental Equity view of the US equity markets:
Increased spending is driving the economy

3
Companies are beginning to spend for IT spending has increased with capex in the recovery
growth to sustain or strengthen their YoY growth (%)
competitive advantages 25%
Nominal GDP Capex IT Spending
“Flush with cash, corporate America is ready to start
15%
spending and growing again.” – Barron’s May 17th.
Over the previous two calendar years, there has been a
5%
meaningful decline in capital spending and a significant focus on expense
reduction. The first quarter of 2010 marked the first time in seven
-5%
quarters that capital expenditures increased. We believe that companies
are investing in their businesses in order to defend market share and -15%
stimulate future growth. This trend is evident in information technology
where recent surveys suggest an increase of over 40% in IT spending -25%
in 20104. This spending should reinvigorate demand while the improved 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
operating leverage should further drive earnings growth. Source: US Census Bureau, Goldman Sachs Research as of 31/05/10.

4
Valuations are attractive Free cash flow yield of large cap US equities vs. 10-year US Treasury
Valuations, as measured by forward- looking price to earnings Notes (31/12/76 – 30/06/10)
ratios, are compelling at 12.5x compared to an historical 16%
LC US Equities FCF Yield (%)
average of 14.7x (31/12/76 through 30/06/10)5. The US equity
10-Year US Treasury Yield (%)
market also looks attractive on a free cash flow yield basis.
12%
We believe free cash flow is one of the most important
ways to measure a company’s economic strength and is an indication of
its long-term health. We believe the current free cash flow yield of large 8%
cap equities is compelling at 7.3% compared to its historical average
+4.4%
of 4.3%5. Comparatively, the yield of the 10-year US government bond 4%
is 3.0%, down from an historical average yield of 7.3%5. In addition to
equities having an attractive free cash flow yield, they also offer the
0%
potential for capital appreciation. 1976 1980 1984 1988 1992 1996 2000 2004 2008 2010
Source: Empirical Research Partners Analysis as of 30/06/10

Management teams are focused on using cash to enhance shareholder value

5
Companies have a multi-decade record high level of cash as a percentage of assets on their balance sheets. The ratio of free cash flow to
stock market value is also close to an historic high5. Management teams have indicated that they are shifting their focus to investing in the
future growth of their businesses rather than hoarding cash. This should bode well for increasing capital expenditures and hiring, which were
largely muted over the past two years. We believe that cash could be deployed strategically towards stock buybacks, increased dividends and
acquisitions. Companies may choose to build scale, acquire complementary businesses, or expand internationally.

Company-specific results will matter again

As volatility normalises, stocks should trade on fundamentals and profitability. Capital allocation separates winners from losers more than ever. With
cash at all time highs and spending coming off 2009 lows, management teams must decide how to use capital. Stewardship of cash and ability to
generate profits post downturn should differentiate winners from losers. Winners will be able to capitalise on opportunities to gain market share,
improve profitability, and ultimately create shareholder value. The market backdrop is ripe for fundamental stock pickers as greater differentiation in
stock level performance creates ample opportunities to buy quality businesses at compelling valuations.

Disclosures
1 GSAM as of 30/06/10.
2 Factset as of 30/06/10.
3 Bloomberg as of 30/06/10.
4 US Census Bureau and Goldman Sachs Research as of 30/06/10.
5 Empirical Research as of 30/06/10.
This information discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions. It also pertains to past performance or is the basis for previously-made discretionary investment decisions. This
information should not be construed as a current recommendation, research or investment advice. It should not be assumed that investment decisions made in the future will be profitable or will equal the performance of investments discussed in this
document. Any mention of a past investment decision is intended only to illustrate our investment approach or strategy, and is not indicative of the performance of our strategy as a whole. Any such illustration is not necessarily representative of other
investment decisions. A complete list of past recommendations may be available on request.
This material has been prepared by GSAM and is not a product of the Goldman Sachs Global Investment Research (GIR) Department. The views and opinions expressed may differ from the views and opinions expressed by the GIR Department or other
departments or divisions of Goldman Sachs and its affiliates. Investors are urged to consult with their financial advisors before buying or selling any securities. This information should not be relied upon in making an investment decision. GSAM has no
obligation to provide any updates or changes.
Holdings may change by the time you receive this report. The securities discussed do not represent all of the portfolio’s holdings and may represent only a small percentage of the strategy’s portfolio holdings. A complete list of holdings is available upon
request. Future portfolio holdings may not be profitable. The information should not be deemed representative of future characteristics for the strategy.
Views and opinions expressed are for informational purposes only and do not constitute a recommendation by GSAM to buy, sell, or hold any security. Views and opinions are current as of the date of this presentation and may be subject to change, they
should not be construed as investment advice.
IMPORTANT NOTICE: in the United Kingdom, this material is a financial promotion and has been approved solely for the purposes of Section 21 of the Financial Services and Markets Act 2000 by Goldman Sachs International, which is authorised and
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